The Office of Professional Responsibility Does Not Always
Ensure Enrolled Agents Are Qualified, and System Limitations Prevented Identification
of Ineligible Representatives

September 29, 2006

Reference Number:†
2006-10-170

This
report has cleared the Treasury Inspector General for Tax Administration
disclosure review process and information determined to be restricted from
public release has been redacted from this document.

Redaction Legend:

1 = Tax
Return/Return Information

3(d) = Identifying Information
- Other Identifying Information of an Individual or Individuals

†††††††††††††††††††††††††††††††††††††††† Deputy
Inspector General for Audit

SUBJECT:††††††††††††††††††† Final
Audit Report Ė The Office of Professional Responsibility Does Not Always Ensure
Enrolled Agents Are Qualified, and System Limitations Prevented Identification
of Ineligible Representatives (Audit # 200510039)

This report presents the results of our evaluation of the
effectiveness of the Office of Professional Responsibilityís (OPR)
administration of the Enrolled Agent (EA) Practitioner Program.

Impact on the Taxpayer

An EA is a Federally authorized tax practitioner who has technical
expertise in the field of taxation.† An
EA may represent a taxpayer at hearings or meetings with the Internal Revenue
Service (IRS) to resolve tax liabilities and other tax obligations and prepare
and file documents for a taxpayer.† The
OPR does not have consistent criteria for issuing EA licenses, ensuring ethical
behavior of the EAs, or identifying EAs who are no longer eligible to represent
taxpayers.† As a result, taxpayers do not
have assurance that EAs are eligible to represent them before the IRS, have a
broad range of technical skills, are compliant with their own tax obligations, and
have not been convicted of a felony.

Synopsis

Because EAs can represent taxpayers before the IRS, it is
important for the OPR to ensure taxpayers are protected from EAs who have not
complied with their own Federal tax obligations or who mayhave criminal records.† However, although the OPR verifies tax
compliance when individuals submit their initial EA applications, it relies on the
EAsí self-disclosure statements of compliance with Federal tax obligations and
any criminal record when processing applications for renewal of EA
authorizations.† Our review of a random
sample of 51 EAs who had renewed their licenses during 2005 determined that 3 (5.88
percent) of the EAs were potentially not in compliance with their Federal tax
obligations and did not self-disclose the information when they filed for
renewal.

In addition, IRS regulations state that persons with felony
convictions may not be eligible to become EAs.†
In 2002, the IRS agreed with an outside consulting firmís recommendation
that all EA candidates undergo a criminal Federal Bureau of Investigation
background check; however, the OPR has not yet implemented a process to verify
that candidates do not have the types of felony convictions that could render
them ineligible for an EA license.†

The OPRís current enrollment process for former IRS
employees is time consuming and subjective.†
By licensing former employees using subjective criteria, the OPR does
not have assurance that former employees have the minimal technical skills
required of all other EAs for all areas of tax administration.† In addition, because the criteria have
changed, the IRS may have unfairly treated former employees denied an EA
license under the old criteria who would qualify under the new criteria.† Finally, IRS databases do not record EA data
consistently.

Recommendations

We recommended the Director, OPR, implement processes for (1)
conducting criminal background checks on persons who apply to become EAs,
before approving their EA licenses, and (2) identifying EAs who are not
compliant with their Federal tax obligations (both individual and business
obligations) and addressing the noncompliance issues.† We also recommended the Director, OPR, revise
the Application for Renewal of Enrollment to Practice Before the Internal
Revenue Service (Form 8554) to include Employer Identification Numbers so the
IRS can verify whether EAs are compliant with their business and employment tax
obligations.† Further, we recommended the
Director, OPR, require that all persons take the Special Enrollment Examination
and cease allowing former IRS employees to become EAs based on experience.† Finally, we recommended the Director, OPR,
make correcting entries in the IRS database for the errors we identified and submit
a request for computer programming changes to ensure appropriate IRS databases are
updated with information on EAs who have failed to renew their licenses.

Response

IRS management
agreed with our recommendations.† The OPR
will work with the Treasury Inspector General for Tax Administration
Office of Investigations to determine if criminal background checks can be
added to the tasks it performs and will revise Form 8554 to include the EAís
Employer Identification Number.† The OPR
will continue to pursue the use of a unique identification number for tax
practitioners to identify tax noncompliance and will conduct random sampling of
all practitioners to review their tax compliance.† In addition, the OPR will continue to conduct
a study to assess the pros and cons of changing the regulation that permits the
Director, OPR, to grant enrollment to former IRS employees by virtue of past
service and technical experience in the IRS.†
The OPR is working with the computer programmers to refine the data that
are currently exchanged between the Enrolled Practitioner Program System and
Centralized Authorization File[1]
so they will include the EAís status.†
Finally, the OPR will provide the Centralized Authorization unit with a
list of the 59 EAs in terminated status we identified and request that their Centralized
Authorization File accounts be placed in ďIneligible Status.Ē† Managementís complete response to the draft
report is included as Appendix V.

Copies of this report are also being sent to
the IRS managers affected by the report recommendations.† Please contact me at (202) 622-6510 if you
have questions or Nancy A. Nakamura, Acting Assistant Inspector
General for Audit (Headquarters Operations and Exempt Organizations Programs),
at (202) 622-8500.

An Enrolled Agent (EA) is a Federally authorized tax
practitioner who has technical expertise in the field of taxation.† EAs, along with Certified Public Accountants
and attorneys, are allowed to represent taxpayers before the Internal Revenue
Service (IRS).† This means they can act
as a power of attorney[2]
to represent a taxpayer at hearings or meetings with the IRS, prepare and file
documents for a taxpayer, and communicate directly with the IRS on behalf of a
taxpayer to resolve tax liabilities and other tax obligations.† EAs are licensed by the IRS and are under the
jurisdiction of the IRS Office of Professional Responsibility (OPR).† One difference between EAs and return
preparers is that there are no special licensing requirements for persons who
only prepare tax returns.† A return preparer
who is not licensed as an EA can be any individual other than an attorney, Certified
Public Accountant, EA, or enrolled actuary who prepares a taxpayerís
return.†

Currently, there are approximately 40,000 active EAs.† There are two ways a person can become an EA:
†by passing a special examination or by
virtue of past experience in certain job series with the IRS.† Once a year, the IRS administered a Special
Enrollment Examination to test a personís competencies in all facets of tax
law.† However, in January 2006, the IRS
outsourced the Special Enrollment Examination to a private contractor that plans
to begin administering the test in October 2006.†

Former IRS employees may apply to become EAs without having
to take the Special Enrollment Examination, if they held certain positions
within the IRS.† There are two types of
designations the OPR grants former IRS employees: †unlimited (unrestricted) enrollment or limited
enrollment.† The OPR grants limited
enrollment if the former IRS employee had specialized knowledge in one area but
not the overall technical knowledge required for unlimited enrollment.†

EAs must renew their licenses every 3 years and pay an $80
renewal fee.[3]† If an EA fails to renew his or her license,
the OPR will place the EA in inactive status. †If an EAís license is not renewed after the
next 3-year period, the EA will be placed in terminated status.

An OPR office in Detroit, Michigan, processes all initial EA
applications, EA renewals, and applications for the Special Enrollment
Examination.† Figure 1 shows the volume
of applicationsprocessed by employees at the DetroitComputingCenter[4]
in Detroit, Michigan.

Figure
1:† Inventory Processed in Fiscal Year
(FY) 2005

Figure 1 was removed due to its size.†
To see Figure 1, please go to the Adobe PDF version of the report on the
TIGTA Public Web Page.

This review was performed at the OPR offices in the IRS
National Headquarters in Washington, D.C., and at the DetroitComputingCenter during the period January
through July 2006. †The audit was
conducted in accordance with Government
Auditing Standards. †Detailed information on our audit
objective, scope, and methodology is presented in Appendix I.† Major contributors to the report are listed
in Appendix II.

EAs are persons authorized by the IRS OPR to represent
taxpayers in resolving their tax issues with the IRS.† Therefore, it is important for the OPR to
ensure taxpayers are protected from EAs who have not complied with their own
Federal tax obligations or who may have criminal records.† Although the OPR verifies tax compliance when
individuals submit their initial EA applications, it relies on the EAsí self-disclosure
statements when processing applications for renewal of EA authorizations.† Our review of a random sample of 51 EAs who had
renewed their licenses during 2005 determined that 3 (5.88 percent) were potentially
not in compliance with their Federal tax obligations.

In addition, IRS regulations state that persons with felony
convictions may not be eligible to become EAs.†
In 2002, the IRS agreed with an outside consulting firmís recommendation
that all EA candidates undergo a criminal Federal Bureau of Investigation
background check; however, the OPR has not yet implemented a process to verify
that candidates do not have the types of felony convictions that could render
them ineligible for an EA license.†

Criminal background checks were not conducted on EA
applicants

Each year, the OPR processes applications from the
approximately 2,000 persons who either pass the Special Enrollment Examination or
are former IRS employees.† While the OPR
reviews tax compliance of these applicants, it does not conduct criminal
background checks to determine whether potential EAs have felony
convictions.†

IRS regulations[5]
clearly state that persons with felony convictions may be censured, suspended,
or disbarred from practice before the IRS. †Because EAs have access to taxpayersí Social Security
Numbers, Employer Identification Numbers,[6]
bank account numbers, and other personal information, there is a risk that
unscrupulous preparers could engage in identity theft activities.† Therefore, it is important that the IRS limit
enrollment to those persons who can pass a criminal background check.†

OPR management advised us the cost of a criminal background
check is approximately $35 per person.† Because
the OPR charges user fees for processing an EA application, it could pass on the
cost of criminal background checks to candidates who apply to become EAs.† The American Bar Association and many States
that license Certified Public Accountants require applicants to pass criminal
background checks.

During 2001 and 2002, the IRS contracted with an independent
consulting firm to review the OPRís operation.†
In January 2002, the consultant recommended the OPR require that all
candidates undergo a criminal Federal Bureau of Investigation background
check.† The IRS agreed with the
recommendation and considered contracting out the requirement for criminal
background checks, but this action had not been taken by the end of our
fieldwork.† OPR management advised us
this action was dependent on other recommendations made by the consultant,
which were not adopted.† Also, the OPR
office was working on higher priority projects (such as the replacement of its
information system and outsourcing of the enrollment examination) and did not
have the resources to implement the recommendation to conduct background
investigations.† However, some of the
higher priority projects have been completed and OPR management believes it may
now have the resources to consider this recommendation.

The OPR did not conduct tax checks before renewing
the licenses of EAs

The OPR requires all EAs to renew their licenses every 3
years and pay a fee of $80.† EAs are
required to certify (self-disclose) the following by checking a box on the
renewal form:[7]

They
have not been convicted of any violation of law (excluding minor traffic
violations).

They
were not disciplined for alleged misconduct by any professional body or
licensing authority.

They
complied with all of their individual and business Federal tax obligations
during the current year and preceding 3 years.

Unlike initial applications, the OPR generally does not
conduct any background research on renewal applications and relies on EAs to
self-disclose their compliance with the requirements shown above.† An exception ismade
for applications and renewal forms of EAs who
self-disclose they have been sanctioned by a State or Federal Government regulatory
authority.†

We selected a random sample of 51 EAs who had renewed their
licenses during 2005 to determine if they were compliant with their Federal tax
obligations.† Of these 51 EAs, 3 (5.88 percent)
had potential noncompliance tax issues.† The
three EAs in our sample did not disclose on their renewal forms that they were
not in compliance with their tax requirements.†
Because the OPR does not verify tax compliance, it renewed the licenses
of the three EAs but did not identify the potential tax noncompliance issues. †Based on the results from our sample, we
estimate 644 EAs who renewed their licenses in 2005 may not have complied with
their personal Federal tax obligations.

We were unable to verify whether the EAs were in compliance
with their business tax obligations because the OPR does not require EAs to
supply the Employer Identification Numbers of their businesses on the renewal
form.† EAs who operate as corporations or
partnerships, or who have employees, must use Employer Identification Numbers
rather than their Social Security Numbers when filing business tax
returns.†

To protect the quality of representation provided to
taxpayers, the OPR can sanction, suspend, disbar, or censure EAs who fail to
comply with their tax responsibilities.[8]† Consequently, during the renewal cycle, the
OPR should identify EAs who have not complied with their personal and business
tax obligations and should appropriately address any noncompliance issues to ensure
the EAs are brought back into compliance.†

Recommendations

Recommendation
1:† The Director,
OPR, should implement a process to conduct criminal background checks on
persons who apply to become EAs, before approving their EA licenses.†

Managementís Response:† IRS
management agreed with the recommendation and will work with the Treasury
Inspector General for Tax Administration Office of Investigations to determine
if criminal background checks can be added to the tasks it performs.† If this is not possible, IRS management will
consider alternative processes, taking into account resource constraints.

Recommendation 2:† The Director,
OPR, should revise the renewal form (Form 8554) to require that EAs provide
their Employer Identification Numbers so the IRS canverify
compliance with their business and employment tax obligations.

Managementís Response:† IRS
management agreed with the recommendation and will revise the Form 8554 to
require that EAs provide their Employer Identification Numbers.

Recommendation 3:† The Director,
OPR, should develop a process and guidelines for identifying EAs who are not
compliant with their Federal tax obligations (both individual and any business
obligations) when they submit their renewal forms and should address the
noncompliance issues.

Managementís Response:† IRS management
agreed with the recommendation and will continue to pursue the use of a Preparer
Tax Identification Number to identify tax noncompliance among tax
professionals.† In the interim, IRS
management will continue to conduct random sampling of all practitioners to
review their tax compliance.† EAs will be
randomly sampled after each renewal cycle.

The IRS requires
persons who are not former IRS employees to demonstrate their competence by
passing a comprehensive test, the Special Enrollment Examination.† When the IRS administered the Examination
prior to 2006, it consisted of four tax areas: †(1) individual income tax; (2) sole
proprietorships and partnerships; (3) corporations including S corporations,[9] fiduciaries, estate and gift tax returns, and
trusts; and (4) ethics, record keeping procedures, appeal procedures, exempt
organizations, retirement plans, practitioner penalty provisions, research
materials, and collection matters.†

The OPR allows certain former IRS employees to become EAs
without taking the Special Enrollment Examination.† The OPR bases this decision primarily on the
former employeeís prior job experience as shown in standardized position
descriptions, as well as input on the employeeís performance from his or her
former supervisor.† Former IRS employees generally must have a minimum
of 5 continuous years with the IRS and show they regularly engaged in applying
and interpreting the Internal Revenue Code and Regulations.† Former IRS employees must submit their applications
for enrollment within 3 years of separation from the IRS.† Since October 2002, the OPR has licensed
approximately 1,331 former IRS employees as EAs.†

The OPR office in
Washington, D.C., consisting of attorneys and paralegals, reviews all
applications from former IRS employees.†
The OPR may grant full (unlimited) enrollment status; grant limited
enrollment status that allows a former IRS employee to represent taxpayers only
in certain types of tax matters, such as collection issues; or deny a former
IRS employeeís application.†

The OPR has
not developed an Internal Revenue Manual section to document how to process
applications from former IRS employees.†
The Internal Revenue Manual is the single official source for IRS
policies, directives, guidelines, and procedures for use by IRS employees in
processing workload.† Most information in
the Internal Revenue Manual is also available to the public and tax
practitioners on the IRS web site (IRS.gov).[10]†Instead of an official manual, the OPR uses
procedures it has developed internally to determine if former IRS employees
qualify to become EAs.† However, over
time, the OPR has changed its procedures from those used by the former office
of the Director of Practice and has begun allowing full enrollment status to certain
positions that were previously granted limited enrollment or were denied
enrollment.† The OPR advised us it uses
judgment to determine which positions within the IRS qualify for enrollment and
it does not have written documentation of the basis for the decision-making
process.†

To evaluate the
OPRís process, we reviewed applications from former IRS employees who were
granted full status, granted limited status, or denied enrollment during FYs
2002 through 2005.† We reviewed a
sample of 50 former IRS employees granted full (unlimited) enrollment and identified 10 persons (20 percent) that appeared
either to lack the technical expertise based on OPR procedures or to have had ethical
issues when they were employed by the IRS.†
It also appears the OPRís treatment of former IRS employees was not
always objective or consistent.† We
identified the following examples in our sample:

****1****

****3(d)****†

In addition, we reviewed the
applications of all 47 former IRS employees who were denied enrollment by the
OPR.† In the majority of cases, the OPR
denied enrollment because it determined the former IRS employees lacked
technical expertise or because of an integrity issue, such as violating the
IRSí Unauthorized Access of Federal Tax Information policy.† However, 7 (15 percent) of 47 persons were
denied enrollment for lack of technical expertise based on OPR procedures in
place at the time of the applications.† It
appears these seven persons would now qualify for either full or limited
enrollment based on current OPR procedures.†

The OPRís process
to enroll former IRS employees is highly subjective and can lead to
inconsistent treatment of former IRS employees.† In addition, the OPRís process may
not ensure all EAs are sufficiently qualified to represent taxpayers in all tax
matters.† We could not verify whether any former IRS employees possessed the
knowledge required in all four parts of the Special Enrollment Examination by reviewing
position descriptions.† We believe a
position description is not adequate and should not be used to assess a
personís overall knowledge of tax law and procedures.† For example, the OPR grants full enrollment
status to former special agents with the Criminal Investigation function and revenue
officers.† However, these positions are
highly specialized.† Revenue officers
possess expertise in collection matters, while special agents are law
enforcement officials who conduct criminal investigations involving tax
fraud.† After reviewing the position
descriptions for special agents and revenue officers, we concluded former IRS
employees in these two positions may not have had exposure to or expertise in
all four areas of the Special Enrollment Examination.

The allowance of limited enrollment status for former IRS employees
is inconsistent and cannot be enforced

The second
type of EA designation for former IRS employees is a limited enrollment status,
which restricts an EA to representing taxpayers in a specific field(s) of
expertise.† The limited enrollment status
includes the following areas of expertise:

Collection matters.

Individual income tax matters.

Exempt organization matters.

Employee plans matters.

Engineering and valuation matters.

Estate and gift tax matters.

International tax matters.

We reviewed a sample of applications from 50 former IRS
employees granted limited enrollment and determined 29 were former revenue officers
who had been allowed to represent taxpayers only in collection matters at the
time they received their EA licenses.†
However, on February 15, 2005, the OPR changed its procedures to
allow former revenue officers above a certain grade level full (unlimited)
enrollment status, provided they met other qualifications, such as satisfactory
performance and no disqualifying conduct.†
We reviewed the revenue officer position descriptions but could not
determine the reason the OPR revised its procedures.† It appeared the revenue officer requirements
had not been changed to now incorporate a wider knowledge of issues beyond
collection matters.† We also found
several inconsistencies in the OPRís determinations involving former IRS
employees who were revenue agents.† OPR
management advised us they had updated the criteria for those former IRS
employees who qualified for unlimited enrollment as a result of periodically reviewing
current IRS position descriptions and changing the definition from strictly
technical knowledge to broader criteria based on the type of IRS experience employees
may have gained.† OPR management believed
its revised criteria was appropriate to qualify former IRS employees to
represent taxpayers.†

Another difficulty with the limited enrollment status is the
OPR does not have a practical way to enforce the limited enrollment status and
monitor the type of tax issues in which EAs engage.† A taxpayer may be unaware that the EA he or
she has hired can represent the taxpayer in only a limited capacity.† When taxpayers engage an EA to represent
them, they must sign a Form 2848 designating the EA as their power of attorney.† However, Form 2848 does not indicate whether
the EA has limited status and can represent taxpayers in only certain types of
tax matters.†

To verify that a tax practitioner has a valid power of
attorney to represent a taxpayer, IRS employees query a database, the
Centralized Authorization File (CAF); however, this database does not identify EAs
who are limited to representing taxpayers in only certain types of tax matters.† In addition, the limited enrollment status is
not widely known among IRS employees because it is not mentioned in any of the
Internal Revenue Manuals for Collection, Examination, or Appeals function employees.† Consequently, current IRS employees may not
be aware they should not be working with and disclosing taxpayer information to
certain EAs with the limited status. †OPR
management advised us they had recognized these limitations and were planning
to phase out the limited enrollment status and either grant full enrollment or
deny applications in the future.

The time to process applications from former IRS employees should
raise concern within the OPR

The OPR has
established a performance goal of 90 calendar days in which to process initial
EA applications.† We calculated the time
it took the OPR to process the applications of the former IRS employees in our 3
samples and found it took the OPR an average of 6 months to process the
applications of the 100 former IRS employees granted full or limited
enrollment.†

In addition, it took the OPR an average of 329 calendar days
to process the applications of the 47 former IRS employees whose applications
for enrollment were denied.† Persons denied
enrollment by the Director, OPR, may appeal.†
The authority to decide enrollment appeals was delegated to the
Associate Chief Counsel (Procedure and Administration) on April 9, 2004.[11]† In our sample, 6 former IRS employees used the
appeal process, which took an average of 235 calendar days.† Overall, it took the OPR an average of 573
calendar days to deny the applications from these 6 former IRS employees. †OPR management advised us former IRS employee
applications will take longer to process because the OPR field office conducts
additional research, including reviewing position descriptions and sometimes contacting
former managers, before approving the applications.† In addition, all former IRS employee
applications are reviewed in the OPR Washington, D.C., office.† Regarding the length of time to process
denials, OPR management advised us they will allow former IRS employees
additional time to address deficiencies so they could then qualify for an EA
license.†

Based on these
various factors, we believe the OPRís current enrollment process for
former IRS employees is time consuming and too subjective.† By licensing former IRS employees using
subjective criteria applied on a case-by-case basis and without documentation
of the basis for the decision, the OPR does not have assurance that these former
IRS employees have the broad range of technical skills required for full
enrollment.† Consequently, the EA license
does not give taxpayers assurance that the EAs have experience in their
particular tax matter(s) or have the
technical aptitude required by IRS regulations.†
OPR management believes it is the responsibility of EAs, as
professionals, to decline engagements if they do not have the ability to
perform them. †The IRS also does not have
a practical method for enforcing limited enrollment status, such as assuring
that EAs will represent taxpayers only in the tax matters within their limited
enrollment authority.† In addition,
because the OPR criteria have changed, the IRS may have unfairly treated former
employees who were denied an EA license under the old criteria but may qualify for
full enrollment under the new criteria.†

A private
consulting firm had also reviewed the OPRís process for enrolling former IRS
employees during 2001 and 2002 and found the OPRís process was inefficient.† The consulting firm recommended the IRS
require that all applicants pass the Special Enrollment Examination before they
are allowed to represent taxpayers.† The
consulting firm also recommended the OPR eliminate the limited enrollment
status for former IRS employees.† At that
time, both the former Director of Practice and the former IRS Commissioner
decided not to implement the consulting firmís recommendation to require former
IRS employees to pass the Special Enrollment Examination, citing harm to
current IRS employees.† However, as
previously discussed, the former Director of Practice applied more restrictive
criteria, which significantly limited the number of former IRS employees who
qualified for an EA license.† With the
expanded criteria currently being used, we believe it is in the best interest
of taxpayers for the OPR toreconsider the
consulting firmís recommendations to require all persons to take and pass the
Special Enrollment Examination and to eliminate the limited enrollment status.

Recommendation

Recommendation
4:† The Director,
OPR, should cease allowing former IRS employees to become EAs based on
experience and should require all persons to take and pass the Special
Enrollment Examination before being granted an EA license.

Managementís Response:†
IRS management agreed with the recommendation.† Because this will require a
change to the regulations, the OPR will conduct a study to assess the pros and
cons of implementation, including business unit feedback.† In the interim, the IRS will review its
current procedures and make appropriate adjustments.

EAs are required to renew their licenses every 3 years.† If an EA fails to file the renewal form and
pay the $80 fee, the OPR does not automatically place the EA in terminated status
on its database, the Enrolled Practitioner Program System (EPPS). †If an EA fails to renew his or her license,
the OPR will place the EA in inactive status, which means the EA is not
eligible to represent taxpayers during this time.† If an EA fails to renew his or her license after
the next 3-year period, the EA will be placed in terminated status.

While the EPPS is used by the OPR to maintain information on
EAs, the IRS also has a separate database for all powers of attorney, the
CAF.† IRS employees use the CAF (not the
EPPS) to determine if a taxpayer has authorized a power of attorney to act on
his or her behalf.† The CAF also
identifies powers of attorney who have been disbarred and who are not allowed
to represent taxpayers.† Due to
disclosure rules, IRS employees must verify that a person has a valid Form 2848
on file before they discuss the taxpayerís account.† However, as stated earlier, the Form 2848
does not indicate whether the EA is in good standing.† As a result, as long as the taxpayer lists a
person portraying himself or herself as an EA on the Form 2848, the CAF will
indicate the person is representing the taxpayer and IRS employees will believe
they are dealing with a licensed EA.

The CAF does not have an interface with the EPPS through which
to exchange data on terminated EAs and does not have a field to show inactive
or terminated EA status.† Consequently, inactive
or terminated status EAs could be listed on the CAF as being in good standing,
although they should not be representing taxpayers because they have not
renewed their licenses with the OPR.† We
identified this deficiency in a prior audit report in August 2004.[12]

We selected a random sample of 130 EAs who were placed in
terminated status during FYs 2002 through 2005 to determine if they were listed
in good standing on the CAF.† Of the 130
EAs sampled, 59 (45.38 percent) were listed on the CAF in good standing,
although they had failed to comply with the OPRís renewal requirements and did
not have valid EA licenses.† We estimate
3,595 EAs who have lost their licenses since FY 2002 are not shown as censured
on the CAF.

Because the IRS has separate computer systems that do not
share all pertinent information, inactive or terminated status EAs could
represent taxpayers without IRS employees or the taxpayers knowing the true
status of the EAs.

Recommendations

Recommendation
5:†
The Director, OPR, should submit a Request for Information
Services[13]
so the CAF can interface with the EPPS to reflect EAs who failed to renew their
licenses.

Managementís Response:† IRS management
agreed with the recommendation.† The OPR will
work with the computer programmers for the EPPS and CAF, as well as the
representative from the Wage and Investment Division Accounts Management
function, to refine the data that are exchanged so they will include the EAís
status.

Recommendation 6:†The Director, OPR, should ensure
the CAF is updated to show a terminated status for the 59 former EAs we
identified in our sample.

Managementís Response:† IRS management
agreed with the recommendation and will provide the CAF unit with a list of the
EAs in terminated status and request that their CAF accounts be placed in
ďIneligible Status.Ē

The overall objective of this review was to evaluate the
effectiveness of the OPRís administration of the EA Practitioner Program.† To accomplish this objective, we:

I.Determined if the OPR adequately and timely processed applications
from persons who took and passed the EA Special Enrollment Examination.

A.Obtained
from the IRS EPPS[14]
database a computer extract showing the number of persons who took the Special
Enrollment Examination and the number of persons who applied to become EAs in
FY 2005.† We conducted audit tests by
reviewing the data on a Microsoft Access database and determined the data
provided by the IRS were reliable.

B.Evaluated
the OPRís enrollment process for new applicants who had passed the Special
Enrollment Examination by reviewing a random sample of 50 of the 1,586 persons
who applied to become EAs in FY 2005.† We
used a 90 percent confidence interval, a +7 percent precision rate, and
an expected error rate of 10 percent to determine the sample size.†

1.
Reviewed
the case files to determine if the OPR properly recorded its determination and
if there was supporting documentation when EA status was not granted.†

2.
Determined
if the OPR conducted tax checks and criminal background checks on persons who
applied to become EAs.

3.
Determined
the length of time it took the OPR to process the applications of the persons
in our random sample and compared the results to the OPRís performance
goal.†

II.Determined if the OPR adequately and timely processed
applications from former IRS employees who applied to become EAs during FYs
2002 through 2005.

A.Obtained
from the EPPS database a computer extract showing the number of former IRS
employees who had applied for enrollment since FY 2002.† We conducted audit tests using a Microsoft
Access database and determined the data provided by the IRS were reliable.†

1.
Reviewed
2 separate samples of 50 former IRS employees who were offered full and limited
enrollment and all 47 former IRS employees denied enrollment during FYs 2002 through
2005 (for a total of 147 of 1,378 former IRS employees). †We used a 90 percent confidence interval, a +7
percent precision rate, and an expected error rate of 10 percent to determine the
sample sizes.†

2.
Determined
the length of time it took the OPR to process applications from former IRS
employees and if it met the OPRís 90-day performance goal.

3.
Determined
if there was justification for the OPRís determination for granting full
enrollment, granting limited enrollment, or denying the application from the
former IRS employees.†

B.
Evaluated
the regulations, procedures, and resources to process applications from †††††† former IRS employees.

III.†††† Determined if the OPR was adequately
conducting the renewal process for EAs that had renewed their licenses.

A.† Obtained from the EPPS database a computer
extract of EAs in active, inactive, and terminated status.† We conducted audit tests using a Microsoft Access
database and determined the data provided by the IRS were reliable.

B.† Reviewed a random sample of 130 of the 7,920 EAs
who had failed to renew their licenses and had been placed in terminated status
during FYs 2002 through 2005 to determine if they had valid powers of attorney
on the CAF.[15]† We used a 90 percent confidence interval, a +7
percent precision rate, and an expected error rate of 10 percent to determine
the sample size.

C.† Evaluated the OPRís renewal process by
reviewing a random sample of 51 of the 10,935 EAs who had renewed their
licenses in 2005 to determine if they were compliant with their tax
obligations.† We used a 90 percent
confidence interval, a +7 percent precision rate, and an expected error
rate of 10 percent to determine the sample size.

IV.†††††† Reviewed the outsourcing of the Special
Enrollment Examination to a commercial contractor to determine the level of
service provided to the public and the cost to the Federal Government.

A.† Reviewed the Federal Governmentís current
process of administering the Special Enrollment Examination and the costs
incurred by the Federal Government.

B.† Reviewed the proposal to outsource the test
including user fees, the type and length of contract, and the statement of
work.† We determined if the Federal Government
would be responsible for any actions or costs after outsourcing the
Examination.

C.† Reviewed the winning contractorís proposal to
determine the level of service and costs passed on to the Federal Government.

This appendix presents detailed information on the
measurable impact that our recommended corrective actions will have on tax
administration.† These benefits will be
incorporated into our Semiannual Report to Congress.

We obtained from the EPPS[16]
an extract of EAs who had renewed their licenses during 2005 to determine if
they were compliant with their Federal tax obligations.† We selected a random sample of 51 of the 10,935
EAs to review their tax compliance.† In
our sampling methodology, we used a 90 percent confidence interval, a 10
percent expected error rate, and a +7 percent precision rate.† Three (5.88 percent) of the EAs in our sample
were potentially not compliant with their Federal tax obligations, but the OPR
had not addressed the noncompliance issues.†
We estimate 644 EAs who renewed their licenses in 2005 may not have
complied with their Federal tax obligations.†
The OPR did not identify potential tax noncompliance when it renewed the
licenses of the EAs.

We obtained from the EPPS an extract of EAs who had lost
their licenses during FYs 2002 through 2005 because they had not complied with
the OPRís renewal requirements.† We
selected a random sample of 130 of the 7,920 unlicensed EAs (in terminated
status) to determine if they were shown as eligible to represent taxpayers
before the IRS.† We found 59 (45.38
percent) of 130 unlicensed EAs were listed on the CAF (the IRS database for
powers of attorney) in good standing.† We
estimate 3,595 unlicensed EAs have valid powers of attorney and are eligible to
represent taxpayers without the taxpayers or the IRS being aware of this
situation.† In our sampling methodology,
we used a 90 percent confidence interval, a 10 percent expected error rate, and
a +7 percent precision rate.†

The response was removed due to its
size.† To see the response, please go to
the Adobe PDF version of the report on the TIGTA Public Web Page.

[1] The
Enrolled Practitioner Program System is the IRS database that stores
information on EAs.† The Centralized Authorization
File is an IRS database that stores information on persons that are allowed to
represent taxpayers as powers of attorney.

[2] A power
of attorney is an individual recognized by the IRS to act on behalf of a
taxpayer.† A taxpayer designates a power
of attorney by using a Power of Attorney and Declaration of Representative
(Form 2848).

[3] The
Department of the Treasury and the IRS published a notice of proposed
rulemaking that would increase the renewal fee to $125 (71 F.R. 51179 August
29, 2006).